News & Stories

Making the Physical Fiscal: Climate Change and the Financial Sector

Posted Sep 11 2019
Andreas Dombret at SIPA on September 5
Andreas Dombret at SIPA on September 5

Proactively taking measures to stop climate change is a universal agenda set forth by the majority of the world’s government leaders.

Largely unknown by the general public, it’s an even bigger priority for the financial sector.

In a September 5 visit to SIPA, Andreas Dombret, former executive board member of the Deutsche Bundesbank—Germany’s central bank—discussed the various ways financial sectors are stepping up to stop climate change from impacting the world’s economy and the planet at large.

The American-born German banker emphasized that the first and largest hurdle is acknowledging that climate change affects the financial sector, a bold statement he theorizes only came to fruition as recently as 2015.

“It was not anybody else—it was the Chinese who put climate change at the top of the G20 agenda in 2015,” Dombret said.

Once the majority of the world’s countries signed onto the Paris Climate Agreement in 2016, climate change finally took the world stage, and leaders in the private sector began to take a serious look at ameliorating the problem.

“But,” Dombret began his discussion after setting the stage, “have we actually progressed since then, since 2015, in understanding how climate change affects the financial sector? Where are we right now?”

Dombret, who is also the former vice-chairman of Bank of America’s global investment banking in Europe, the Middle East and Africa, said “green finance” has taken hold in the financial sector as both public and private entities are learning to adapt to its growing effects.

“Green finance is about how the financial sector can broadly speaking contribute to mitigate the effects of climate change and into promoting environmentally sustainable developments.”

As SIPA students and sustainability-minded guests packed into the lecture room, Dombret specified just how little information there is about climate change’s effect on the financial sector, and why it is so important for the private financial sector to act proactively to save money, with the added bonus of the environment.

Citing his own experience as a central banker, Dombret said risk aversion is why the sector is finally addressing developing issues presented by climate change, and why—however commendable in theory—green finance does not go far enough to stop the effects from taking a permanent hold.

“But how does climate change potentially affect the financial sector?,” Dombret asked the enthusiastic SIPA crowd. “Let’s establish the facts first,” he answered with a smile.

Categorizing the effects of climate change into both physical and transitional changes, Dombret emphasized how the financial sector was affected by 2005’s Hurricane Katrina and used the current example of Hurricane Dorian to underscore why it remains a pressing issue.

He divided the effects of climate change onto the financial sector into two categories, physical and transitional.

Physically, Dombret said, Katrina and Dorian wreaked havoc in New Orleans and the Bahamas, and governmental leaders are still attempting to come up with ready sources to fix much-needed infrastructure and protect its citizens. Adjusted for inflation, the costs of the former have surpassed $160 billion, while Dorian will likely cost tens of billions if not $100 billion or more. And powerful hurricanes are becoming all the more common.

“Hurricane Harvey, almost forgotten, alone could require up to 180 billion U.S. dollars in cost, which would make it more costly than Hurricane Katrina in 2005,” Dombret said. “So clearly extreme weather events or changing climate conditions could result in significant losses for both the public and private sector.”

The second category is even more financially devastating: transitioning markets and learning how to adapt to a now almost fossilized field of work. Whereas the coal and mining industry once dominated financial markets, there has been a push for greener energy options, and the effects are well-felt.

“One very optimal sided example are the top U.S. coal producers,” Dombret explained. “Their combined market capitalization has fallen by well over 90 percent, nine-zero, since 2010, which tells you that they have been seeing reevaluations because of climate change.”

Instead, Dombret said, the challenge of climate change has prompted markets to evolve more quickly. This has allowed for more greener technologies to take a stronghold as private entities learn to adapt to growing public concern.

In the Q&A period, Dombret addressed the U.S. departure from the Paris climate agreement.

“To meeting this Paris Agreement goal is of extreme most important and will require enormous efforts by all countries. And that’s why the current standard of the U.S. administration towards the agreement worries me quite a bit,” Dombret stated. “At the same time, governments across the world with the exception of the United States and Brazil have voiced a strong commitment to honoring this ambitious agreement of 2015.”

“And if those countries succeed,” Dombret concluded, “it is to the best scientific evidence available and will significantly reduce the physical risks.”

— Catherina Gioino MPA ’20